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Gaming stocks are a gamble amid regulation crackdown - UBS

UBS started its coverage of GVC with a 'buy' rating and at the same downgraded William Hil and Flutter to 'neutral' and 'sell' respectively

William Hill PLC - Gaming stocks are a gamble amid regulation crackdown - UBS
Ladbrokes owner GVC is preferred by UBS

Bookie stocks are a gamble, that’s according to analysts at Swiss bank UBS, although they started coverage of GVC Holdings PLc (LON:GVC) as a ‘buy’ in a review of the sector.

The analysts think that rivals William Hill PLC (LON:WMH) and Paddy Power owner Flutter Entertainment PLC (LON:FLTR) are exposed to more risks than GVC, which is the parent of the Ladbrokes Coral and Foxy Casino brands.

Regulatory risk should be the key focus for investors, the UBS analysts said in the note.

“With this note we focus on the regulatory backdrop in the UK looking to assess the issues around responsible gambling, the probability of further regulation, and quantifying the potential downside including operator positioning,” they said.

“We believe that further regulatory changes are likely, and as such we now embed the risk of regulation into our company valuations by assuming a £2 staking limit on UK casino gaming is introduced as a proxy for broader regulatory risk.”

READ: GVC eyes top-end profits though online growth slows

UBS’s preference toward GVC is due to a more attractive risk-reward against these same risks.

The Swiss bank downgraded Flutter to ‘sell’ from ‘neutral’ and moved William Hill to ‘neutral’ from ‘buy’.

With a new ‘buy’ rating and a 1,075p price target UBS sees some 16% upside for GVC shares, which currently trade at 922.8p.

“Our illustrative analysis suggests the greater potential impact for William Hill given high exposures to the UK and lower margins,” they said. "For GVC we see the lowest impact for a funding or staking limit given a lower UK exposure.”

They added: “Our analysis of the regulatory backdrop has changed our relative and absolute preferences across the sector.

"In particular, we now see greater risks for William Hill given the combination of concentrated geographical exposure and leverage, whilst we initiate on GVC with a Buy reflecting a favourable risk reward, and attractive valuation even in a downside scenario.

“For Flutter after strong recent share price increase a combination of lower forecast growth than peers, high exposure to regulatory change, and strong execution in the US already priced in.”

Berenberg weighs in too

Elsewhere, European investment bank Berenberg also updated its views on the sector today.

Berenberg's analysts repeated a ‘buy’ rating for William Hill whilst describing the shares as underperforming the sector peers despite making good progress in its retail, online and US businesses – the ‘buy’ rating comes with a 240p price target against a current price of 182.75p.

GVC is also rated by Berenberg as a ‘buy’ with a 1,200p price target, with its analysts commenting that the share price remains attractive even after a “strong rebound” in the second half.

And Paddy Power owner Flutter is designated by Berenberg as a ‘hold’, with an 8,500p target, with the bank's analysts noting that they expect the share price will be dominated by acquisition and consolidation stories, along with its performance in the United States.

Quick facts: William Hill PLC

Price: 183.95 GBX

LSE:WMH
Market: LSE
Market Cap: £1.61 billion
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